Exam #3 Econ
With a 20% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is
$80
When banks borrow money from the Federal Reserve, these funds are called
discount loans.
The interest rate the Fed charges banks borrowing from the Fed is the
discount rate.
When talking about aggregate supply, it is necessary to
distinguish between long-run aggregate supply and short-run aggregate supply.
Moving along a short-run aggregate supply curve, resource prices (and other input prices) ________, the money rate wage ________, and potential GDP ________.
do not change; does not change; does not change
The supply side school of thought proposed:
doing all of the answers in this question.
Substitution (i.e. interest rate) effects help explain the slope of the aggregate demand curve. This refers to the:
effect on investment expenditures that result from a change in interest rates produced by a change in the price level.
Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side.
federal government; states
Money that has value simply because the government declares it so, is called:
fiat money.
Contactionary monetary policy:
fights inflation.
Expansionary monetary policy:
fights recession.
Supply side economists focus policy change by lowering the :
highest (i.e. marginal tax rates).
Members of the Federal Reserve system's Board of Governors
hold 14-year staggered terms.
For monetarists the main cause of economic fluctuations is changes in
inappropriate monetary policy.
According to aggregate demand and supply analysis, the rising oil prices coupled with the global financial crisis in 2007-2008 caused the unemployment rate to ________ and the level of real aggregate output to ________.
increase; decrease
An increase in the quantity of money
increases aggregate demand.
Expansionary fiscal policy:
increases government spending, lowers taxes, increases GDP, and decreases unemployment.
As the price level falls and other things remain the same, real wealth ________ and ________.
increases; the quantity of real GDP demanded increases
Fiscal policy
involves changing taxes and government spending.
The long-run aggregate supply ( LRAS) curve
is vertical.
One reason why many supply-side economists focus policy on lowering the top marginal tax rate is their belief that:
it would have the greatest positive influence on the decision makers in the economy with the highest marginal product (i.e. most productive in the economy).
The definition of M2 includes
savings deposits. M1. time deposits. All of these(x)
If the Fed wants to decrease the quantity of money, it can
sell U.S. government securities.
During periods of inflation, which function of money is most severely affected?
store of value
When you keep money in a change jar to be used later, what function is it fulfilling?
store of value.
Economists who believe tax policy has a big effect on employment and potential GDP are called
supply-siders.
If a tax cut increases people's labor supply, then
tax cuts increase potential GDP.
If the economy is on the negative slope of the Laffer curve and you raise taxes:
tax revenues will fall.
Factors that shift the long-run aggregate supply and potential GDP rightward include an increase in:
technology. quality and quantity of other inputs. quantity of capital (physical capital and human capital). quantity of labor. all of the above.(x)
The real business cycle theory asserts that changes in ________ lead to changes in ________.
technology; productivity
The U.S. aggregate demand curve shifts leftward (decreases) if:
the Federal Reserve increases the interest rate by cutting the money supply.
Monetary policy is controlled by
the Federal Reserve.
A fall in the money wage rate (or other input prices) shifts
the SRAS curve rightward but leaves the LAS curve unchanged.
For a commercial bank, the term "reserves" refers to
the cash in its vaults and its deposits at the Federal Reserve.
Aggregate demand decreases when
the government implements monetary policies that decrease the quantity of money.
The short-run aggregate supply curve is upward sloping because
the money wage rate (and other input prices) remains constant so the higher prices makes it profitable for firms to expand production.
Suppose that following an expected decline in the price level, workers immediately renegotiate their money wage rates to match the fall in prices. This behavior is most consistent with
the new classical cycle theory.
For movements along the long-run aggregate supply curve,
the price level and the money wage rate change by the same percentage.
The supply of real GDP is a function of
the quantities of labor, capital and the state of technology.
Other things constant, the economy's aggregate demand curve shows that
the quantity of real GDP demanded decreases when the price level rises.
At potential GDP
unemployment is at its natural rate.
According to the new Keynesian theory,
unexpected changes in aggregate demand change real GDP. expected changes in aggregate demand change real GDP. current and past expectations of the price level determine the money wage rate. All of the answers are correct.(x)
The rational expectations/new classical theory argues that the primary factor leading to business cycles are
unexpected changes in aggregate demand.
The real business cycle (RBC) theory assets that the impact on real GDP of technological change is
usually positive but occasionally negative.
Keynes used the term "animal spirits" to represent
volatile investment spending arising from fluctuations in business confidence.
An increase in the price level creates a
wealth effect. decrease in consumption expenditures. movement along the aggregate demand curve. All of the above answers are correct.(x)
Which of the following is true?
Aggregate supply is "passive" in the Keynesian model. Keynesian economics is focused on aggregate demand. Classical economics is focused on aggregate supply. Aggregate demand is "passive" in the real business cycle theory. All of the answers are true.(x)
Which of the following statements is FALSE?
An increase in disposable income leads to a decrease in aggregate demand.
In a demand-pull inflation, the AD ( steps A to B) curve shifts ________ and the SRAS curve shifts ________ (steps B to C).
rightward; left ward
The Keynesian explanation of the business cycle rests on several concepts, including
rigid money wage rates (i.e. sticky prices and wages).
Contactionary monetary policy:
risks recession.
What caused the stagflation of the 1970s?
1973 oil shock 1979 oil shock collapse of the Bretton-Woods fixed exchange rate system sharp increase in agriculture prices all of the answers in this question(x)
Which theory fundamentally denies demand-side economic shocks?
real business cycle theory
The "double coincidence of wants" problem is
resolved by the use of money.
The nation is divided into ________ Federal Reserve districts, each having a Federal Reserve Bank.
12
The free banking ERA was from:
1836-1864.
What do these dates in the U.S. have in common (1819,1837,1857,1873,1884,1893,1907, 1930-1933, 2007-2009)?
Financial panics that caused recessions
The current chairman of the Federal Reserve is
Jerome Powell
Sticky prices and wages are a property of the__________ school of thought.
Keynesian
Which of the following is true:
Monetary base = currency in circulation plus bank reserves.
The regulatory function of the central bank began with the:
National Banking ERA.
"Current economic parameters are determined by past rational expectations" is a property of the__________ school of thought.
New Keynesian
The Federal Open Market Committee (FOMC) is composed of
Presidents of 5 Federal Reserve regional banks and the Board of Governors.
Which of the following is a criticism of real business cycle theory?
Real business cycle theory believes that productivity changes are caused by technology changes when in fact they are caused by changes in aggregate demand.
3-6-3 Rule: Pay savers 3% interest on savings, charge borrowers 6% on loans, and be on the golf course by 3pm.
True
Keynes Law: Demand creates its own supply; implies there cannot be insufficient aggregate supply and implies demand-caused recessions.
True
Say's Law: Supply creates its own demand; implies there cannot be insufficient aggregate demand or demand caused recessions.
True
The FED was founded in 1913 due to the banking panic of 1907
True
On the Fed's balance sheet, assets include
U.S. government securities and loans to depository institutions (discount loans).
Why does the aggregate demand curve slope downward?
Wealth effect export effect interest rate effect all of the answers in this question(x)
Which of the following is true?
a change the money wage and other resource prices does not shift the long-run aggregate supply. a shift right of the long-run aggregate supply and potential GDP will also shift the short-run aggregate supply curve right as well. a shift left of the long-run aggregate supply and potential GDP will also shift the short-run aggregate supply curve left as well. all of the above are true.(x)
Which of the following shifts the aggregate demand curve left ward?
a decrease in government expenditures on goods and services
Other things equal, along the aggregate demand curve, a higher price level is associated with
a decrease in the quantity of real GDP demanded.
One possible result of a decrease in aggregate demand (ceteris paribus):
a recession.
Taken to its logical conclusion, the real business cycle theory (and New Classical Theory) proposes that:
actual GDP always equals potential GDP, making all unemployment voluntary.
"Those borrowers who most desperately want loans are the ones who are least able to repay the loans," is an example of:
adverse selection.
If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of
adverse selection.
People expect their incomes will decrease next year (i.e. consumer expectations). As a result, the ________ will shift ________.
aggregate demand curve; left ward
People expect their incomes will decrease next year. As a result, the ________ will shift ________.
aggregate demand curve; left ward
People expect their incomes will decrease next year. As a result, the ________ will shift ________.
aggregate demand curve; leftward
The real business cycle theory proposes that::
aggregate demand shocks do not effect the business cycle.
The quantity of real GDP supplied (or aggregate production) at different price levels is reflected by the
aggregate supply curve.
Financial intermediaries reduce transaction costs by:
all of the answers are correct.(x) diversification. economies of scale. expertise.
Which of the following events will increase long-run aggregate supply?
an advance in technology
Which of the following shifts the aggregate demand curve rightward?
an increase in government expenditure
Which of the following could start a demand-pull inflation?
an increase in government expenditures
Which of the following shifts the aggregate demand curve rightward?
an increase in investment
Which of the following does NOT shift the aggregate demand curve?
an increase in the price level
Which of the following increases aggregate demand and shifts the AD curve rightward?
an increase in the quantity of money and a resulting fall in the interest rate
According to many mainstream economists (and the view of your instructor), the financial markets:
are inherently unstable due to substantial negative externalities.
Money is created by
banks making loans.
Rational expectations are
based on all relevant information.
According to the interest rate effect (i.e. intertemporal substitution effect), a fall in the price level will
cause the interest rate to fall so that investment increases and the quantity of real GDP demanded increases.
Demand-pull inflation persists because of
continuing increases in the quantity of money.
M1 includes
currency, checking deposits, and travelers checks.
Higher taxes
decrease aggregate demand.
According to the wealth effect, if real wealth decreases then people
decrease their consumption expenditure.
A decrease in government expenditure on goods and services
decreases aggregate demand.
A decrease in government transfer payments
decreases aggregate demand.
An increase in the money wage rate (or of other input prices)
decreases the short-run aggregate supply.
If decision makers become so pessimistic that all new money injected into the economy by the FED becomes hoarded and not loaned out or spent, we are in a:
liquidity trap.
Depository institutions
make profit from the spread between the interest rate they pay on deposits and the interest rate they receive on loans.
The short-run aggregate supply curve is upward sloping because
marginal costs rise with increased output so firms have to receive higher prices to justify their increase in output.
The functions of money are
medium of exchange, unit of account, store of value, and standard of deferred value.
The most important function of money is its role as:
medium of exchange.
Adaptive expectations are a property of the__________ school of thought.
monetarist
The sum of currency in circulation and bank reserves is the ________.
monetary base
"Being careless with fire because you have fire insurance," is an example of:
moral hazard.
Which theory distinguishes between expected and unexpected fluctuations in aggregate demand and asserts that only unexpected changes can affect real GDP?
new classical cycle theory
Which of the following is a tool that is most used by the Fed to control the quantity of money?
open market operations
One assumption of the new classical model is that
people make rational expectations about aggregate demand.
The long-run aggregate supply curve is vertical because
potential GDP is independent of the price level.
Aggregate supply describes the behavior of
producers.
Real business cycle theory says that the factor leading to the business cycle is changes in
productivity
The Employment Act of 1946 states that it is the responsibility of the federal government to
promote full employment.
"If policy is anticipated, there is no short-run" is a property of the__________ school of thought.
rational expectations/new classical
If the economy is in short run equilibrium then
real GDP can be greater than, less than, or equal to potential GDP.
In the long-run
real GDP is equal to potential GDP.
In the figure above, in the short-run macroeconomic equilibrium,
real GDP is less than potential GDP.
By itself, an increase in aggregate demand increases GDP by the least amount (or zero) in the ________.
real business cycle theory
